P3 Project Delivery: Is size the problem?
March 29, 2023
Within the alternative delivery space, the debate rages on regarding the merits of Public-Private Partnerships (P3s). New findings continue to surface, like the Auditor General of Ontario's report which found 86% of projects were under budget, saving taxpayers $12 billion dollars. Yet, the construction industry stands firm that better risk transfer needs to be considered.
What if the problem is not the model? What if it is the size of the project?
Dr. Bent Flyvbjerg studies mega projects at Oxford University. He has captured some interesting statistics, such as, on urban light rail transit (LRT) projects, overruns closeout around 40% over budget, not adjusting for inflation or the cost of settling construction claims. The most shocking statistic is that only 2 out of 1,000 mega projects (valued over $1 billion) achieved the budget, schedule, and social benefit targets, regardless of the delivery model. Dr. Flyvbjerg summarizes the reason for such bad performance is due to highly “underestimating” risk which he links to several human biases, such as confidence, power, cognitive, and strategic misrepresentation bias. In broad stokes, it is human’s struggle to conceptualize really big things.
To illustrate, let's look at time. One million seconds works out to be 11.5 days, whereas one billion seconds is just shy of 32 years. With this order of magnitude established, it becomes safe to say, using the analogy of time, we understand and conceptualize what we will be doing in 11 days, but have no idea what we will be doing 32 years from now. Why would it be any different for a project with a billion dollar budget?
What is more interesting, the current trend is not to revert to a project scale that we can better conceptualize, but rather to make some tweaks to the standard delivery models, call them collaborative and continue to increase the size of the projects. The Progressive-Design-Build (PDB) model is a derivative of the Design-Build (DB) model incorporating collaboration. Engineers and contractors form teams which compete for projects. The collaboration component comes from the introduction of the development stage where the owner advances the procurement with only one of the teams, during which the design is fully developed as an integrated effort between the engineer, contractor, and owner.
By contrast, in the traditional DB model, the owner selects a shortlist of qualified teams that proceed into the RFP stage. In the RFP stage, typically three teams each produce 30-60% design drawings, isolated from the owner, and at the end of the process submit a fixed-fee based on the partially completed designs. The team with the lowest price wins.
As you can see, the DB model, puts emphasis on pay for performance, while the PDB model emphasizes establishing certainty. Creating certainty, removes risk, but the delivery team is still looking for opportunity, which is typically found at the other end of the spectrum from risk. Meaning, behaviours will need to change to support these collaborative models, which is likely something the entire industry desires to do.
At the end of the day, all forms of delivery models will continue to be used. Associations like the Canadian Council for Public-Private Partnerships (CCP3) will continue to promote using private funding on major infrastructure projects, because they provide long-term stable returns which institutional investors like pension plans want to invest in. So, the demand is there for mega projects with private debt opportunity. How they are delivered - collaboratively or not - is yet to be seen.
What is clear, collaboration is required on all projects, regardless of size or delivery model.
Associated is excited about the various alternative delivery projects on which we are currently partnering, including the Buffalo Pound Water Treatment Plant serving Regina and Moose Jaw, Saskatchewan (PDB), and the Highway 1 Reinstatement Project at Tank Hill near Lytton, BC (Alliance). These projects, and those on the horizon, provide opportunities to apply our expertise and share our learnings on the services we provide to our partners and clients.
About the author:
David Nagy, MBA, P.Eng. is Associated Engineering’s National Practice Lead, Alternative & Major Projects. He has 18 years of experience as a Senior Project Manager and Bridge Engineer specializing in the delivery of transportation and bridge projects. His experience includes various delivery models, such as design-bid-build, design build, P3, program management, and construction management.